Stock Trading: How to Place Buy and Sell Orders

Stock Trading: How to Place Buy and Sell Orders

Reading time: 8 minutes

Welcome to the exciting (sometimes perplexing) world of stock trading, where the difference between buy and sell is more than four letters.

In traditional stock dealing, you buy and sell shares of companies that are publicly traded. However, for those who prefer to trade the underlying price movement without taking ownership of these stocks, trading Contracts for Differences (CFDs) is an option and will be the central focus of this post. CFDs are leveraged derivatives (deriving their value based on the underlying asset [in this case, stocks]) that permit trading, investing, and hedging. 

Trading in any market, whether in futures, options, physical share dealing or CFDs, requires communicating your actions (buy/sell) to the broker, and this is where order types step into the fray. The two most common order types are the market order and pending order (often called a limit order).

Order Types

Market Order:

A market order is the most straightforward type to understand when trading CFDs. A market order informs your broker to buy or sell a stock CFD at the next available price on the market at that point in time. It is ideal for traders who want to enter or exit the market quickly. However, this speed can come at a cost if trading volatile markets and may incur what’s known as slippage. This is the difference between the desired price (the price at which the trader/investor clicks that buy or sell button) and the execution price (the price at the order is filled). You must understand that when the order is sent/received, the underlying price could move, which is something to bear in mind, particularly in volatile markets.

Limit Order:

A limit order allows its user to effectively tell the broker the price they want to buy or sell a CFD contract for—they limit the price to that desired price level or better. Traders and investors use this type of order for many reasons; some use this simply because they cannot be at the screens (these order types will execute even if your computer is switched off). 

• A buy limit order is set below the current market price of a stock (you will find that trend traders often use these to buy dips).
• A sell limit order is set above the current market price (traders looking to sell in downtrends will usually opt for this order).

Stop Orders:

Like limit orders, stop orders allow traders to set their desired execution price. A stop order is employed when traders plan to buy (sell) only when the prices increase (decrease) to the stop price. Importantly, once the stop order is filled, it will automatically become a market order.

• A Buy-Stop order sets an order to buy at a price higher than the current market level. This order is commonly used when breakout traders expect an asset's price to increase after surpassing a specific price level: a resistance level.  
• A Sell-Stop order sets a sell order below the current market price. If the market price decreases through a specified price level (also known as a support level), the CFD is sold at the sell-stop level at the next available price (breakout sellers anticipating follow-through selling below support tend to adopt this type of order).

Protective Stop-Loss Orders

Protective stop-loss orders are an essential risk management tool in CFD trading. They act as a safety net, closing a position at a predetermined price to prevent further losses. Protective stop-loss orders essentially function as buy and sell-stop orders to exit the market.

For example, a trader who is long (buying the stock expecting its price to increase) generally positions their protective stop-loss orders beneath a technical level (say, a support level). If the trade is unfavourable and the protective stop-loss order is triggered, this will close the long position by selling (hence, it is in effect a sell-stop order to exit the long position at the next available price level).

How to Place Orders

Now that you understand the type of orders, let’s learn to try and place an order. We will place a buy order on the MetaTrader 4 (MT4) platform in this scenario. Ensure you have a CFD trading account or a demo account with FP Markets.  

Step 1

Log in to MT4

Step 2

Locate the ‘Market Watch’ window through Ctrl+M, where you will find all the available instruments. Double-click on the CFD you want to trade. 

Step 3

The 'Order' window will now open. This window is your control centre for managing and executing your trade.

• In the 'Volume' field, input the number of lots you wish to trade.
• From this window, you can input protective stop-loss and take-profit levels.
• Depending on whether you are trading with a market or a pending order, this can be selected from the drop-down tab: ‘Type’.

Step 4

After placing your order, monitor its progress in the ‘Trade’ tab in the Terminal window at the bottom of the platform. You can view your open positions here, including your unrealised profit or loss.

Step 5

To close a trade, go to the ‘Trade’ tab in the Terminal window. Right-click on the open trade you wish to close and select ‘Close Order’. In the new window, confirm by clicking the ‘Close’ button.

Bottom Line

Keep in mind that each type of order—market, limit, and stop—is a tool in your financial toolkit. Just like you wouldn't use a hammer to screw in a bolt, you shouldn't use a market order when a limit order would be preferable.